The transition from Canadian generally accepted accounting principles (GAAP) to International Financial Reporting Standards (IFRS) will be different for every company. However, most companies will experience some amount of change, and the degree of change will depend upon their particular situation and industry, changes in accounting policies required, specific first-time adoption issues and the extent of data needed to be obtained and maintained for IFRS financial reporting differences. Based on attending numerous IFRS seminars, discussions with companies, review of publications from Big 4 Accounting firms and accounting bodies in Canada, here are my views on the top IFRS accounting issues that will impact virtually all Canadian publicly accountable entities during 2010 and 2011.
Componentization – IAS 16 – an item should be separated into parts (components) when the cost of those parts is significant in relation to the total cost of the item. There is a similar concept in Canadian GAAP, but it has been applied only when practical to do so, which essentially meant that it has very rarely been applied at all. In contrast to Canadian GAAP, componentization will be an expectation and requirement under IFRS.
Impairment – IAS 36 – Impairment of Assets applies to Property, Plant and Equipment (PP&E), goodwill and intangibles and involves significant estimation complexities for mining companies. It also applies to joint venture interests and equity accounted investments. IAS 36 sets out significantly different guidance on identifying an asset that may be impaired and the measurement of impairment.
Provisions and Asset Retirement Obligations – IAS 37 – Provisions, Contingent Liabilities and Contingent Assets uses different concepts and terminology to address the broad area of “provisions” and contains more detailed guidance than GAAP on constructive obligations and contracts. IFRS does not have a direct equivalent to CICA 3110 Asset retirement obligations (ARO’s), but these obligations — as well as other kinds of environmental liabilities — fall within the scope of IAS 37.
IFRS 3 Business Combinations was revised in early 2008. Canadian guidance on business combinations is also being revised: a converged standard is expected to be issued in Canada prior to IFRS changeover. On conversion to IFRS, an entity can choose the date from which it retroactively applies the IFRS business combination standard. This considerably simplifies conversion. One of the more significant differences between revised IFRS 3 and GAAP includes the fair valuation of 100% of all identifiable assets and liabilities acquired once control is achieved.
Joint Ventures – Canadian GAAP requires that an interest in a jointly controlled entity be proportionately consolidated. IAS 31 Interest in Joint Ventures recommends this treatment but also currently allows equity accounting as an alternative measure. However, IASB proposals remove the proportionate consolidation alternative, except in certain limited circumstances, and introduce a requirement to equity-account all jointly controlled entities.
IAS 23 Borrowing Costs, as amended in 2007, became mandatory effective in 2009. It requires that an entity capitalize borrowing costs directly attributable to acquiring, constructing or producing a qualifying asset (an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) as part of the asset’s cost. Under IFRS, an entity cannot choose to expense all borrowing costs, as it can with Canadian GAAP.
IAS 21 – The Effects of Changes in Foreign Exchange Rates is more specific than Canadian GAAP about how an entity should determine its functional currency. This depends on identifying the entity’s primary economic environment, based in particular on the currency that mainly influences sales prices for goods and services, or labour, material and other costs of providing goods or services.
IAS 12 Income Taxes and CICA 3465 Income taxes follow substantially the same approach (a liability method focusing on temporary differences between the tax base of an asset or liability and its carrying amount in the balance sheet). However, there are many detailed differences including a specific provision which exempts entities from recognizing temporary differences on items arising from other than business combinations that do not upon initial recognition affect profit and loss. For example, the initial recognition of provisions for Asset Retirement Obligations, are not considered as generating recognizable temporary differences.
IAS 32 – Financial Instruments: Presentation. The measurement of the components of convertible and compound instruments could be different depending on the facts and circumstances. Entities will need to review the financial instrument contracts to identify any potential differences between Canadian GAAP and IFRS.
IFRS 1 First-time Adoption of International Financial Reporting Standards provides direction for the first time application of IFRS. It generally requires the complete retrospective application of all current IFRS standards. However, IFRS 1 also provides a first-time adopter with a variety of options that provide some relief from retrospective application in certain specific areas that would otherwise be extremely onerous to apply on a retrospective basis. The exceptions and exemptions in IFRS-1 will significantly assist the implementation, but will require careful consideration of accounting policy choices. IFRS-1 is definitely an important standard to become familiar with and should be carefully reviewed with your accounting professional.
Disclosures – As IFRS is principles based, it gives entities more choice with regard to how to account for something, it then compensates for this by requiring more disclosures so companies can explain how an item was actually accounted for. That additional information and note disclosures is designed to assist with comparability – the notion is that if companies are able to have a little more flexibility in the accounting with IFRS, then companies should explain exactly how the item was accounted for. Organizations will need to take a look at everything that is already being disclosed under Canadian GAAP, and then determine what IFRS disclosures are required. Then, the company must evaluate which additional disclosures must be included in the financial statements and then proceed one step further and pose the questions – what information is required to meet these disclosures, and how can it be collected on an ongoing basis? Perhaps information systems and business processes will need to be revamped in support of IFRS disclosure requirements.
I hope this helps. This is one of a series of blogs that is meant to convey information relating to Canada’s transition from Canadian GAAP to IFRS.
The views and opinions expressed are those of Edelkoort Smethurst Schein CPA’s LLP, and may include excerpts from other authors and web-sites as identified. Readers should discuss IFRS details with their accounting professionals. Edelkoort Smethurst Schein CPA’s LLP disclaims any responsibility whatsoever in regards to interpretation and use of any of this information.
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